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Are we building too many apartments and will the demand keep up?

City skylines are dotted with cranes all working to build new apartments. But could the market be facing an oversupply?

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Over the past 25 years, the number of apartments in Australia has increased by 78 per cent1. There are now well over a million apartments in Australia – up from less than 700,000 back in the early 1990s2.

But over the last few years in particular, we’ve seen phenomenal growth in apartment construction. The number of apartments built each year has tripled since 2009, and apartments now account for around one-third of residential building approvals3.

Demand for apartments has skyrocketed

Much of this growth has been driven by home buyer demand. More Australians than ever are choosing apartment living. One in ten of us now live in an apartment4 – motivated by low maintenance lifestyles and in many cases, affordability. According to the Reserve Bank, the median price of apartments is around 30 per cent lower than houses5.

The flurry of apartment construction has seen some commentators raise the issue of a possible oversupply. The Housing Industry Association (HIA) believes the pace of construction could cool in the months ahead though not necessarily because of an oversupply.

Rather, developers may put construction plans on hold in response to a number of factors including recent falls in property prices, tighter lending standards, and disincentives to overseas buyers6. The HIA also noted that the slowdown in apartment construction is likely to be focused on metropolitan Melbourne and Sydney.

Buyer demand continues to underpin the market

On the flipside, today’s more affordable property market is attracting first home buyers back into the market7 – and for these buyers, apartments are often an ideal first home. This can offer real support in terms of underpinning apartment values.

Additional demand could come from the nation’s 5.5 million baby boomers8, who may be more likely to downsize to an apartment, encouraged by new legislation that allows from the sale of a family home to be contributed to super.

As a clear example of how fears about an apartment downturn can be overblown, in 2017 we saw a number of media headlines spruiking a ‘glut’ of apartments in Brisbane. Yet the latest figures from property research group CoreLogic show apartment values in Brisbane have risen 0.8% over the past year9. If we focus on inner city Brisbane, where many pundits said the oversupply was greatest, property values have actually climbed 2.1% over the last 12 months10. So much for a downturn.

Are we building too many apartments?

Along with the growing trend to apartment living, it pays to remember that our population is increasing by around 400,000 people annually11. It’s a no-brainer that all these people need somewhere to live.

In addition, more than a quarter of a million people migrate to Australia each year12 – often from countries where apartment living is the norm.

The bottom line is that property – be it your home or a rental investment, is a long term asset. And as the Reserve Bank has noted, the composition of homes being built in Australia has changed substantially in the past decade. The shift towards apartment living is not an exception. Our love of freestanding houses and low density living is relatively unique in the developed world. By building more apartments we are simply heading more towards international norms13.

The reality is that apartments are set to play an important role in the housing market in years to come. Between first home buyers, new arrivals to Australia and downsizers, the stock of new apartments looks set to be absorbed in the next few years.

If you’re holding off on buying a unit because you’re expecting prices to slump, you could miss the boat. Why not give your local Mortgage Choice broker a call and they can go through your options with you?

*Note: the home loan with the lowest current interest rate is not necessarily the most suitable for your circumstances, you may not qualify for that particular product, and not all products are available in all states and territories.

#The comparison rate provided is based on a loan amount of $150,000 and a term of 25 years. WARNING: This Comparison Rate applies only to the example or examples given. Different amounts and terms will result in different Comparison Rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the Comparison Rate but may influence the cost of the loan.

~Not all brokers or advisers offer the products of all lenders or solution providers.